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The Decision in HR and Others v JAPT and Others
(Reported at [1997] Penions Law Reports 99)

Ian Hammond (taken from Isssue No 4 – December 1997)

1 Background

This was a case in which a company established a pension scheme in trust for its employees. The trustee company was mainly staffed by people closely involved with the employer.

In July 1990, the trustees lent £3 million of scheme money to the company without security. Two months later, without taking any independent advice, they contracted to buy the company’s main site for £3.5 million.

£3 million of the purchase price was discharged immediately by the trustees writing off the loan. They paid the balance in cash within a month, although completion and the transfer of title were not due for two more years.

Six months or so later, the trustees paid the company £500,000 to accelerate completion by a year, although in fact it did not take place until September 1992, as originally scheduled. Shortly after completion, the trustees sold the site for a little over £2 million.

In the meantime, the trustees had increased the pension entitlement of one of the company’s directors by £500,000. This was done on the basis of advice from the actuaries who had been led to believe that the main site was worth £4 million and hence that the scheme was in surplus. In fact, given its true value, the scheme was in deficit.

When new trustees were appointed to the scheme, they issued proceedings against the trust company and several of its directors. The points set out below arose in the context of an application by one of those directors to strike out the claims against him as an individual.

2 Analysis of the Claims against the Individual Director

(a) Direct Fiduciary Duty

It was alleged that the director owed a fiduciary duty directly to the beneficiaries of the scheme, past, present and future.

The leading authority on this point is Bath -v- Standard Land Company ([1911] 1 Ch 618). There, it was argued that trust company directors were, as a necessary consequence of their position, personally in a fiduciary position to beneficiaries. The argument failed, Cozens Hardy MR summarising the position as follows:-

`…it is of course true that a company acts through its directors. But that does not involve the proposition that if a breach of trust is committed by a company, a beneficiary can maintain any action against the directors in respect of such breach of trust… Directors stand in a fiduciary position only to the company, not to creditors of the company, nor even to individual shareholders…`.

`In my opinion, [the directors of a trust company] are liable for matters of personal conduct inconsistent with their full knowledge of the fiduciary character of the duties which in the name of the company they have to carry out.`

Attempts were made to distinguish the present case on the basis that it involved a one-trust, no-asset trust company. However, the Judge held (apparently with some reluctance) that the principle which the Court of Appeal had established in the Bath case applied to all trust companies, whatever their size.

(b) Direct Duty in Negligence

The Claims were put in two ways.

(i) Assumption of Responsibility

It was argued that the director had assumed responsibility directly to the beneficiaries on the basis set out in the recent House of lords cases, White -v- Jones [1995] 2 AC 207 and Henderson -v- Merrett [1994] 3 WLR 354.

The judge had little sympathy with this argument. He said that, in these and other recent high-profile cases, the House of Lords had been concerned to cure apparent defects in the law, so as to do justice between the parties. He did not feel that any such considerations arose in the present case. On the contrary, finding that there had been an assumption of responsibility on the part of an individual director might well do harm to established authorities such as Salomon -v- Salomon [1897] AC 22, which would suggest that, if anything, the company itself should be regarded as assuming the responsibility.

(ii) Personal Liability of Directors

The alternative case was put on the basis of the Court of Appeal’s recent decision inWilliams -v- Natural Life Health Foods Limited [CA 05 December 1996]. That was a case in which the Plaintiff took a franchise over a health food shop on the basis of inaccurate financial projections which they had received from a director of the vendor company. In his judgment, Hirst LJ stated:-

`….in order to fix a director with personal liability, it must be shown that he assumed personal responsibility for the negligent mis-statement made on behalf of the company`.

Here, it was argued that the trustee was a sole purpose trust company, with no income or assets of its own, that the individual concerned was a director of both the trust company and the employer and that he was personally involved in the transactions under review. The Judge nonetheless ruled that he had not `over-stepped the line beyond which his acts would involve an assumption of personal liability`.

(c) Accessory Liability

The third head of claim was on the basis of constructive trusteeship, or `accessory liability`, pursuant to the line of authority most recently explained by the Privy Council in Royal Brunei Airlines -v- Tan [1995] 2 AC 378.

One of the Privy Council’s conclusions in Royal Brunei was that accessory liability should be found only where the `accessory` was dishonest. Having analysed that decision, the Judge concluded that dishonesty in this sense is governed by an objective, rather than a subjective standard. In other words, if a reasonable person would have regarded the conduct as dishonest, that will be sufficient even if the person concerned thought otherwise.

The Judge said that it was clear that the was an arguable case against him on that basis.

(d) Indirect Fiduciary Duty and Indirect Tort

The fourth argument was that the director owed a duty of care to the trust company, that he had breached that duty and caused loss. The trust company’s claims against him were, in turn, trust property which passed to the new trustees on their succession. Hence, the new trustees could sue upon them. This was described as the `dog leg` claim.

The argument was based, in part, on the decision of the Privy Council in Royal Brunei.There, Lord Nicholls made a comment about advisers and others who provide services to trustees. He stated:-

`For the most part, [they] owe the trustees a duty to exercise reasonable skill and care. The rights flowing from that duty form part of the trust property. As such, they can be enforced by the beneficiaries in a suitable case if the trustees are unable or unwilling to do this`.

The director argued that there was an important distinction to be drawn between professional advisers, who give advice to the trustees in relation to specific issues, and directors of a corporate trust company, who have an on-going involvement in the trust’s affairs. In support of this, he relied on the case of Young -v- Murphy [1994] 13 ACSR, which also involved claims against the former directors of a corporate trustee, this time of several trusts. There were, the Court held:-

`The right of action held by the trust company against the directors cannot be shown to have been trust property: there is no basis upon which to conclude it was. Unlike [professional advisers], the directors cannot be said to owe their duties to the company only in relation to some particular trust or trusts: nor were their duties imposed in relation to some particular item of trust property`.

However, Mr Justice Lindsey felt that it was at least arguable that the decision in Youngcould be distinguished. He placed particular reliance on the fact that, in the present case, the directors did owe their duties only in relation to a particular trust. He said that the claims were arguable and could proceed.

3 Summary and Analysis

Mr Justice Lindsey therefore rejected as possible lines of argument:

That the director owed a fiduciary duty to the beneficiaries; and

That the director owed a direct duty of care to the beneficiaries.

However, he found it at least arguable that the directors might:-

Incur accessory liability, if shown to have been dishonest; and

Have an indirect fiduciary liability to beneficiaries under the `dog-leg` claim.

It is important to emphasise that the Judge had only to decide, for the purpose of this application, whether or not the claims were arguable. Beyond this, he expressed no opinion as to their merits.

Of the two surviving claims, the `dog-leg` claim may be the more difficult to sustain. As was pointed out in the recent commentary on this case in the journal of International Trust and Corporate Planning, a key issue arises here as to who the cause of action belongs to. Mr Justice Lindsey equated claims against professionals who advise trustees with claims against individual directors. Both are agents of the trust company. However, whereas the advisers’ fees will be borne by the trust fund, the director is retained by his company and it is the company which receives fees. Moreover, that position is unaffected by whether the company is trustee of one trust or several.

As regards accessory liability, that would depend on there having been `dishonesty` on the part of the trustee and hence will be of limited application. However, it is important to bear in mind that, if trust company directors were found to be liable under this head, then a clause exempting trustees from all liability other than that caused by dishonesty would not assist them.